Should I Reaffirm My Home Mortgage?

Decision

In a Chapter 7 bankruptcy, you will be given the option to reaffirm certain secured debts. A reaffirmation agreement basically says you will continue making your payments on a specific debt and retain the collateral. If you default in the future, the creditor may pursue any remedies allowed by state law, such as repossession or obtaining a money judgment. With respect to the reaffirmed debt, your bankruptcy discharge will make no difference at all and it would be as if you had never filed in the first place.

Some bankruptcy attorneys refuse to allow their clients to reaffirm any real estate loans. But here in Wisconsin, reaffirming your first mortgage isn’t terribly risky. Here’s why:

If you default on your home mortgage in Wisconsin, the lender will foreclose. Once the foreclosure judgment is entered, the clock starts ticking on the redemption period, a 6-12 month period during which you are allowed to stay in the house before the sheriff can sell the place in a foreclosure sale. During this redemption period, you live in the house without paying rent or a mortgage payment. Wisconsin law gives the lender two options on redemption:

1) A 12-month redemption period, after which the lender may sue for a deficiency judgment (the difference between what you owe and the value of the house), OR

2) A 6-month redemption period and a waiver of the right to any deficiency judgment.

Because most homeowners who default on their mortgages won’t be able to pay a deficiency judgment anyway, most lenders in Wisconsin choose to waive the deficiency judgment in exchange for the shortened redemption period.

So the reaffirmation agreement gives the lender a right (sue for a deficiency) that it likely won’t exercise. Keep in mind that holders of junior mortgages will usually sue for a deficiency, so it rarely makes sense to reaffirm a second or third mortgage. Also, each state has its own rules on foreclosures. I can’t tell you what the risk of reaffirming a mortgage may be in any other state.

As you can see, there’s not much risk in reaffirming a first mortgage in Wisconsin. Whether you should reaffirm will depend on your personal circumstances. There are some benefits to reaffirming, such as:

– Refinancing. Most lenders will not refinance if you do not reaffirm the debt in your bankruptcy. They will tell you your lawyer messed up by not filing the reaffirmation agreement (that’s not true), and that you should reopen the bankruptcy case to have the reaffirmation agreement filed (that won’t be allowed in most jurisdictions).

– Online account access. Some lenders won’t let you manage your account online without a filed reaffirmation agreement.

– Statements and automatic payments. Some lenders won’t send monthly statements for your mortgage payments or allow you to set up automatic debits from your bank account without a reaffirmation agreement. You’ll have to remember to send your payments each month without being reminded.

– Credit reporting. Most lenders won’t report your payments to the Credit Reporting Agencies if a reaffirmation agreement wasn’t signed.

Most of these are just ways for the bank to punish you for not reaffirming the debt. The Bankruptcy Code doesn’t require any of these measures; they are simply bank policies. If the ability to refinance with that specific bank or credit reporting are important to you, you may wish to reaffirm your home mortgage. But if the risks of reaffirming outweigh those benefits, you might decide to simply continue making your mortgage payments without reaffirming the debt. Talk with your bankruptcy attorney to decide if reaffirming your home mortgage makes sense in your situation.

 

Image credit: Freddy The Boy/flickr

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